Earlier this week, gold mining company IAMGOLD (NYSE:IAG) released its guidance numbers for 2017. This year, IAMGOLD is on track to enhance its output as compared to 2016, driven by its high-grade mines. More importantly, the company will be able to keep its costs constant as compared to last year. Using IAMGOLD's projections for 2017, I will try to project the company's potential financial performance for the year, which will be then used to gauge the potential upside.
Forecasting the top line performance
In 2017, IAMGOLD pegs its gold production in a range of 845,000 to 885,000 ounces. At the mid-point, this means that IAMGOLD can be expected to produce 865,000 ounces of gold, which is an increase of around 6.5% from last year's levels. Since IAMGOLD has already laid out its production target for the year, it will be easy to calculate the company's revenue.
Now, for 2017, IAMGOLD believes that the price of gold will average $1,250 an ounce. However, for conservatism's sake, I will take a gold price of $1,200 an ounce in my calculations because this is the level at which gold is currently trading. So, at a gold price of $1,200 an ounce and a potential production level of 865,000 ounces, IAMGOLD's revenue this year should come in at $1.04 billion.
This represents an increase of close to 7% as compared to the revenue generated by the company in the past twelve months. Hence, even at a conservative pricing estimate, IAMGOLD is on track to deliver an improvement in its top line this year. But, there might be slight weakness in the bottom line of IAMGOLD since the mid-point of the company's potential cost base for the year is slightly higher than 2016.
Analyzing the cost profile
This year, IAMGOLD forecasts that its cash costs will range between $740 and $780 an ounce as compared to a range of $740 and $770 an ounce last year. Therefore, the mid-point of the cash cost guidance at $760 an ounce is slightly higher than last year. In all, the company's cost of goods sold will total $657.4 million ($760 X 865,000 ounces).
This gives the company a gross profit of $380.6 million, which results in a gross profit margin of almost 37%. From the gross profit, we will have to deduct the operating expenses and general and administrative expenses in order to arrive at the potential earnings of IAMGOLD in 2017. Now, IAMGOLD does not single out its operating costs and general and administrative expenses separately.
Rather, according to standards set by the World Gold Council, investors should be focusing on the all-in sustaining costs of a gold miner in order to capture expenses related to operations and mining. More specifically, all-in sustaining costs include royalties and production taxes, derivative losses/gains, corporate G&A, sustaining capital expenditure, etc. Hence, IAMGOLD's all-in sustaining costs will paint a clearer picture of how much earnings investors can expect from the company.
Now, for 2017, IAMGOLD's all-in sustaining costs are expected between $1,000 and $1,080 an ounce, or $1,040 an ounce at the mid-point. With IAMGOLD expected to produce 865,000 ounces of gold this year, its total all-in sustaining costs will come in at approximately $900 million. This leaves the company with earnings of $140 million approximately in 2017 as I had calculated a revenue of $1.04 billion earlier in the article.
Calculating the potential upside
Now, in order to arrive at the earnings per share, we will need to see how many shares outstanding the company has. At present, IAMGOLD has 450.7 million shares outstanding. However, after its acquisition of Merrex Gold, IAMGOLD's shares outstanding will increase by 6.9 million shares, taking its total outstanding share count to 457.6 million.
Therefore, its earnings per share will come in at $0.30 this year (dividing total earnings of $140 million by the outstanding share count). Now, I will use this projected earnings per share for 2017 to calculate IAMGOLD's share price.
Currently, IAMGOLD does not have a trailing price to earnings ratio since it is currently a loss making company. This is why I will be using the gold sector's median P/E ratio in order to arrive at IAMGOLD's potential stock price for 2017. Now, the median P/E of the gold mining sector is 16.85. At this price to earnings ratio and potential earnings of $0.30 per share for 2017, the company's stock price will be $5.00 per share by the end of the year.
As compared to IAMGOLD's current stock price, this represents an increase of around 13%. This might not seem too attractive at first, but considering that I have assumed a lower gold price of $1,200 an ounce for the year as compared to the actual gold price of $1,250 an ounce for 2016, which represents a drop of 4%, the performance can be considered to be strong.
In fact, the upside at IAMGOLD can be stronger if the average price of gold rises to more than $1,200 an ounce. With the majority of the gold forecasts for 2017 at more than $1,500 an ounce, IAMGOLD might deliver stronger upside this year. However, even in a conservative scenario as I have assumed in the article, IAMGOLD will be able to deliver double-digit upside for the year.
IAMGOLD looks well-placed to deliver gains this year on account of its improved production and a slight decline in all-in sustaining costs. In fact, as seen above, even if gold prices drop this year, IAMGOLD will still deliver double-digit gains. So, it will be a good idea to stay long IAMGOLD in 2017 given the possible gains that it can deliver.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.